Polygon Labs and Arktouros propose new regulatory framework for DeFi
Polygon Labs and Arktouros law firm have collaborated on a new regulatory framework that suggests certain decentralized finance (DeFi) protocols should be designated as critical infrastructure for the US. The proposal, published by Rebecca Rettig and Katja Gilman of Polygon Labs and Michael Mosier of Arktouros, aims to combat illicit finance activities in the DeFi space.
US Treasury’s Office of Cybersecurity and Critical Infrastructure Protection to oversee decentralized DeFi protocols
The proposed framework recommends that genuinely decentralized DeFi protocols should be overseen by the US Treasury’s Office of Cybersecurity and Critical Infrastructure Protection (OCCIP). The OCCIP plays a crucial role in enhancing the security and resilience of the financial services sector’s critical infrastructure.
Three-step solution to legal challenges in DeFi
Polygon’s framework proposes a three-step solution to address the legal challenges in DeFi. The first step involves creating a legal definition for “System Control Persons” or “SCPs” who have operational authority over blockchain-based systems. SCPs would need to adhere to anti-money laundering (AML) requirements. The framework also suggests the creation of a new category called “critical communications transmitters” for genuine DeFi systems.
Distinguishing between centralized finance, traditional finance, and DeFi
The proposed framework distinguishes between centralized finance (CeFi), traditional finance (TradFi), and DeFi, each with their own control mechanisms. This aligns with guidance from FinCEN, the Treasury’s Financial Crimes Enforcement Network.
Positive actions and preventing illicit activities
The authors emphasize the importance of balancing the prevention of illicit activities with promoting positive actions. This aligns with the Treasury’s goal of promoting economic prosperity and ensuring financial security in the US.
Hot Take: A Potential Solution for Addressing Illicit Finance Concerns in DeFi
Polygon Labs and Arktouros’ proposed regulatory framework offers a potential solution to address concerns around illicit finance in the DeFi space. By designating certain DeFi protocols as critical infrastructure overseen by the OCCIP, the framework aims to enhance security and resilience. The three-step solution, including defining “System Control Persons” and creating a new category for genuine DeFi systems, provides clarity and accountability. Additionally, distinguishing between CeFi, TradFi, and DeFi allows for tailored control mechanisms. This approach seeks to strike a balance between preventing illicit activities and promoting positive actions, aligning with the Treasury’s objectives of economic prosperity and financial security in the US.
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